5500 - General Counsel's Opinions

The evolution of stored value cards since the issuance of the
original General Counsel's Opinion No. 8, in 1996, has created the
need to revisit the issue of deposit insurance coverage for the holders
of such cards. Stored value cards now commonly serve as the delivery
mechanism for vital funds such as employees payroll and government
payments such as benefits and tax refunds. Network branded reloadable
stored value cards also serve as an alternative mechanism for holders
to access funds held in a bank for their benefit. This new General
Counsel's Opinion No. 8 seeks to clarify the deposit insurance
coverage available to the holders of stored value cards whose funds are
held for their benefit in insured depository institutions.

The FDIC is responsible for insuring "deposits" at insured
depository institutions. See 12 U.S.C. 1821. Also, the FDIC
is responsible for collecting assessments on "deposits."
See 12 U.S.C. 1817. In fulfilling these responsibilities,
the FDIC must be able to determine the existence of "deposits" at
insured depository institutions.

In the Federal Deposit Insurance Act ("FDI Act"), the term
"deposit" is defined at section 3(l). See 12 U.S.C.
1813(l). In general, a "deposit" is "the unpaid balance of
money or its equivalent received or held by a bank or savings
association." 12 U.S.C. 1813(l)(1). The definition encompasses the
funds in checking accounts, savings accounts and certificate of deposit
accounts. See Id. It also includes the funds received by a
bank or savings association in exchange for the issuance of traveler's
checks. See Id. Similarly, the term "deposit" includes
the funds underlying official checks and money orders. See
12 U.S.C. 1813(l)(4).

In short, the statutory definition of "deposit" at section
3(l) of the FDI Act is very broad. By express terms, section 3(l)
encompasses almost all funds subject to transfer or withdrawal through
traditional access mechanisms (such as checks, traveler's checks,
official
checks and money orders) provided that the funds have been placed at an
insured
depository institution.1

Following the failure of an insured depository institution, the FDIC
is responsible for paying insurance on "deposits." See
12 U.S.C. 1821(f); 12 U.S.C. 1821(a). In applying the insurance limit,
the FDIC must aggregate all deposits "maintained by a depositor in
the same capacity and the same right." 12 U.S.C. 1821(a)(1)(C). In
other words, the FDIC must aggregate all deposits owned by a particular
depositor in a particular ownership category. For example, the FDIC
will aggregate all deposits held by a particular depositor in the form
of "single ownership accounts." The FDIC will provide separate
insurance coverage for deposits in other ownership categories, such as
"joint ownership accounts" or "revocable trust accounts."
See 12 CFR part 330.

In applying the insurance limit, the FDIC must be able to determine
the identities of depositors. This task is different than determining
the existence of "deposits." A depositor is the owner of a
deposit, i.e., a creditor with a particular type of claim
against a depository institution. In contrast, as previously discussed,
a "deposit" is the money entrusted to the depository institution,
i.e., the depository institution's obligation to repay the
money.

The FDI Act provides that the FDIC, in determining the identities of
depositors following the failure of an insured depository institution,
may rely upon the records of the failed insured depository institution.
See 12 U.S.C. 1822(c). In accordance with this statutory
authority, the FDIC has promulgated rules for determining the owners of
deposits placed at insured depository institutions by agents or
custodians, i.e., deposits owned by persons who do not deal
directly with the depository institution. First, the agency or
custodial relationship must be disclosed in the account records of the
insured depository institution, e.g., through an account
title such as "ABC Company as Custodian." See 12 CFR
330.5(b)(1). Second, the identities and interests of the actual owners
must be disclosed in the records of the depository institution or
records maintained by the custodian or other party. See 12
CFR 330.5(b)(2). Third, the deposits actually must be owned (under the
contract between the parties or any applicable law) by the named owners
and not by the custodian. See 12 CFR 330.3(h); 12 CFR
330.5(a)(1).

When the FDIC's requirements are satisfied, the insurance coverage
"passes through" the custodian, i.e., the nominal
accountholder, to each of the actual owners of the deposit.
See 12 CFR 330.7(a). When the requirements are not
satisfied, the named accountholder is treated as the owner.

The rules summarized above can be applied to the funds underlying
stored value products. In the case of such funds, two issues must be
address: (1) whether (or when) the funds should be classified as
"deposits"; and (2) whether (or when) the holders of the access
mechanisms (as opposed to the distributor of the access mechanisms)
should be treated as depositors. Stored value products are discussed in
greater detail below.

Stored Value Products

Stored value products, or "prepaid products," may be divided
into two broad categories: (1) Merchant products; and (2) bank
products.

A merchant card (also referred to as a "closed-loop" card)
enables the cardholder to collect goods or services from a specific
merchant or cluster of merchants. Generally, the cards are sold to the
public by the merchant in the same manner as gift certificates.
Examples are single-purpose cards such as cards sold by book stores or
coffee shops. Another example is a prepaid telephone card.

Merchant cards do not provide access to money at a depository
institution. When a cardholder uses the card, the merchant is not paid
through a depository institution. On the contrary, the merchant has
been prepaid through the sale of the card. In the absence of money at a
depository institution, no insured "deposit" will exist under
section 3(l) of the FDI Act. See FDIC v. Philadelphia
Gear Corporation, 476 U.S. 426 (1986).

Bank cards are different. Bank cards (also referred to as
"open-loop" cards) provide access to money at a depository
institution. In some cases, the cards are distributed to
the
public by the depository institution itself. In many cases, the cards
are distributed to the public by a third party. For example, in the
case of "payroll cards," the cards often are distributed by an
employer to employees. In the case of multi-purpose "general
spending cards" or "gift cards," the cards may be sold by
retail stores to customers.

A bank card usually enables the cardholder to effect transfers of
funds to merchants through point-of-sale terminals. A bank card also
may enable the cardholder to make withdrawals through automated teller
machines ("ATM's"). In other words, a bank card provides access
to money at a depository institution. The money is placed at the
depository institution by the card distributor (or other company in
association with the card distributor), but is transferred or withdrawn
by the cardholders. In some cases, the card is "reloadable" in
that additional funds may be placed at the depository institution for
the use of the cardholder.

This General Councel's opinion does not address merchant cards
because such cards do not involve the placement of funds at insured
depository institutions. The applicability of this General Counsel's
opinion is limited to bank cards and other nontraditional access
mechanisms, such as computers, that provide access to funds at insured
depository institutions.

"Deposits"

The original GC8 did not address all types of stored value products
offered by (or through) insured depository institutions. For example,
it did not address systems in which the depository institution
maintains a pooled self-described "reserve account" for all
cardholders but also maintains an individual subaccount for each
cardholder. Likewise, the original GC8 did not discuss systems in which
the access mechanisms are distributed not by the insured depository
institution but instead are distributed by a third party (such as the
employer in the case of payroll cards or a retail store in the case of
general spending cards). Hence, the original GC8 is obsolete and must
be replaced.

Having reconsidered the issue of whether funds underlying stored
value products qualify as "deposits," the Legal Division has
concluded that such funds always should be treated as "deposits"
provided that the funds have been placed at an insured depository
institution. This conclusion is based upon the general premise that the
funds underlying stored value cards and other modern access mechanisms
are no different, in substance, than the funds underlying traditional
access mechanisms such as checks, official checks, traveler's checks
and money orders.

In other words, the access mechanism is unimportant. Whether funds
should be classified as "deposits" should not depend upon the
access mechanism (or whether the access mechanism is a plastic card as
opposed to a paper check). Rather, as recognized by the Supreme Court,
the existence of a "deposit" depends upon whether "assets and
hard earnings" have been entrusted to a bank. See FDIC v.
Philadelphia Gear Corporation, 106 S. Ct. 1931 (1986).

In concluding that the funds are "deposits," the Legal
Division relies upon paragraph 3(l)(1), paragraph 3(l)(3) and paragraph
3(l)(4) of the statutory definition. See 12 U.S.C.
1813(l)(1); 12 U.S.C. 1813(l)(3). Each of these paragraphs is discussed
in turn below.

Paragraph 3(l)(1). This paragraph defines "deposit"
as "[t]he unpaid balance of money or its equivalent received or
held by a bank or savings association in the usual course of business
and for which it has given or is obligated to give credit, either
conditionally or unconditionally, to a commercial, checking, savings,
time, or thrift account.* * *" 12 U.S.C. 1813(l)(1). Under this
paragraph, funds are "deposits" when a commercial entity (such as
the employer in the case of payroll cards or a retail store in the case
of general spending cards) places "money or its equivalent" at an
insured depository institution (i.e., places funds into a
"commercial" account). Also, under this paragraph, funds are
"deposits" when placed into checking accounts. In addition, funds
are "deposits" when given to a bank in exchange for a traveler's
check. See id. Some stored value products are the functional
equivalents of checks or traveler's checks.

Paragraph 3(l)(3). This paragraph defines "deposit"
as "money received or held by a
bank or savings association, or the credit given for money or its
equivalent received or held by a bank or savings association, in the
usual course of business for a special or specific purpose.* * *"
12 U.S.C. 1813(l)(3). Under this paragraph, funds are "deposits"
when held by a bank for the "special or specific purpose" of
covering withdrawal or transfer instructions from the holders of stored
value cards or other nontraditional access mechanisms. In the original
GC8, the Legal Division found that paragraph 3(l)(3) applies only to
cases in which the customer's spending plans are very specific but
such a narrow reading of the statute is not supported by the
legislative history. See FDIC v. Philadelphia Gear
Corporation, 106 S. Ct. 1931 (1986). Also, the Legal Division is
unaware of any case in which a court found that a bank's liability did
not qualify as a "deposit" because the customer's spending plans
were insufficiently specific.

Paragraph 3(l)(4). This paragraph defines "deposit"
as "outstanding draft* * *cashier's check, money order, or other
officer's check issued in the usual course of business for any
purpose.* * *"12 U.S.C. 1813(l)(4). Some stored value products are
the functional equivalents of cashier's checks or money orders.

As outlined above, the statutory definition of "deposit" is
very broad. The Legal Division concludes that this definition
encompasses all funds underlying stored value cards and other
nontraditional access mechanisms to the extent that the funds have been
placed at an insured depository institution.

A separate issue is whether the holder of an access mechanism (as
opposed to the distributor of the access mechanism) should be treated
as the insured depositor for the purpose of applying the insurance
limit. This issue is addressed below.

Depositors

Under the existing insurance regulations at 12 CFR part 330, the
FDIC is entitled to rely upon the account records of the failed insured
depository institution in determining the owners of deposits.
See 12 CFR 330.5. Therefore, in cases in which a separate
account has been opened in the name of the holder of the access
mechanism, the FDIC will recognize the holder as the owner of the
deposit.

In some cases, in an agency or custodial capacity, the distributor
of the access mechanisms (or agent on behalf of the distributor) might
open a pooled account for all holders of the access mechanisms. In such
cases, the FDIC may provide "pass-through" insurance coverage
(i.e., coverage that "passes through" the agent to the
holders). See 12 CFR 330.7. Such coverage is not available,
however, unless certain requirement are satisfied. First, the account
records of the insured depository institution must disclose the
existence of the agency or custodial relationship. See 12
CFR 330.5(b)(1). This requirement can be satisfied by opening the
account under a title such as the following: "ABC Company as
Custodian for Cardholders." Second, the records of the insured
depository institution or records maintained by the custodian or other
party must disclose the identities of the actual owners and the amount
owned by each such owner.

See 12 CFR 330.5(b)(2). Third, the funds in the account
actually must be owned (under the agreements among the parties or
applicable law) by the purported owners and not by the custodian (or
other party). See 12 CFR 330.3(h); 12 CFR 330.5(a)(1). If
these three requirements are not satisfied, the FDIC will treat the
custodian (i.e., the named accountholder) as the owner of
the deposits.

It is encouraged that accurate information concerning FDIC insurance
coverage be displayed on stored value cards. This information should
include the name of the insured depository institution in which the
funds are held. When appropriate, the card also should state that the
funds are insured by the FDIC to the cardholder. These disclosures will
provide the cardholder with important information concerning FDIC
deposit insurance coverage.

Conclusion

This opinion replaces the opinion published by the FDIC in 1996.
Under this opinion, all funds underlying stored value cards and other
nontraditional access mechanisms will be
treated as "deposits" to the extent that the funds have been
placed at an insured depository institution. If the FDIC's standard
recordkeeping requirements are satisfied, the holders of the access
mechanisms will be treated as the insured depositors for the purpose of
applying the insurance limit. Otherwise, the distributor of the access
mechanisms (i.e., the named accountholder) will be treated
as the insured depositor.

This opinion is based upon the proposition that the form of the
access mechanism is unimportant. Whether the mechanism is traditional,
such as an ATM card, book of checks or official check, or
nontraditional, such as a stored value product, the access mechanism is
merely a device for withdrawing or transferring the underlying money.
The "deposit" is the underlying money received by the depository
institution and held for an accountholder.

[Source: 74 Fed. Reg. 67155, November 13,
2008]

1The only exceptions are certain narrow exceptions expressly
created by Congress (such as an exception for bank obligations payable
solely outside the United States). See 12 U.S.C. 1813(l)(5).
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